CRS: Double-Dip Recession: Previous Experience and Current Prospect

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Slower growth in the first half of 2011, along with recent economic indicators suggesting the weakening of the country's momentum, have increased fear of a double dip recession.

Concerns have been expressed that growth in the United States may falter to the point where the U.S. economy again experiences recession. A double-dip or W-shaped recession occurs when the economy emerges from a recession, has a short period of growth, but then, still well short of a full recovery, falls back into recession. This prospect raises policy questions about the current level of economic stimulus and whether added stimulus may be needed. The pace of the recovery has been relatively slow and growth has recently decelerated. For the first year of the recovery, real GDP grew at an average rate of 3.3%, slow by the standard of earlier post-war recoveries, but fast enough to stop the rise of the unemployment rate at 10.1% in October 2010 and to cause it to fall to 9.5% by mid-2010. In the recovery's second year, the rate of GDP growth slowed to an average rate of 1.6%, and the unemployment rate was only slightly lower at 9.1% by mid-2011. Growth remained weak during the recovery's third year, advancing at an annual rate of 1.9%, and the unemployment rate had only improved to 8.2% by May 2012. Other indicators, such as weak consumer spending, falling house prices, reduced flows of credit, the prospect of fading fiscal stimulus, and the premature return of recession in the euro area are also worrisome.

Double-dip recessions are rare. There are only two modern examples of a double-dip recession for the United States: the recession of 1937-1938 and the recession of 1981-1982. They both had the common attribute of resulting from a change in economic policy. In the first case, recession was an unintended consequence of the policy change; in the second case, recession was an intended consequence. Historically, there has been what is termed a "snap back" relationship between the severity of the recession and the strength of the subsequent recovery. In other words, a sharp contraction followed by a robust recovery traces out a V-shaped pattern of growth. However, unlike earlier post-war recessions, the recent recession occurred with a financial crisis. Research suggests that a slow recovery with sustained high unemployment is the norm in the aftermath of a deep financial crisis.

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